A Few Reasons Why Dick’s Sporting Goods Looks Like a Buy

Sporting goods retailer Dick's Sporting Goods (NYSE: DKS) has lagged the market this year, but its shares have gained some momentum lately after the company posted in-line fourth-quarter results. Multiple factors helped Dick's perform well. For instance, the cold weather across the U.S. set most companies back but it gave Dick's an advantage as cold-weather-related items saw strong sales.

Going forward, Dick's has lined up a number of initiatives to grow its business. Can it keep flourishing in the wake of competition from Foot Locker (NYSE: FL) in the footwear market as well as the other prominent sporting-goods retailer, Cabela's (NYSE: CAB) ? Let's take a look at Dick's recent performance and its strategies going forward.

Performing wellDick's performed well in the fourth quarter as its revenue increased from $1.81 billion to $1.9 billion, in-line with the consensus estimate. Omni-channel growth mainly drove this revenue. Consolidated earnings also increased to $138.6 million from $129.7 million last year.

Dick's performed impressively despite a shorter holiday season and the cold weather. In fact, the cold weather had a positive impact on its sales. Its same-store sales in the fourth quarter increased 6.3% due to its investments in advertising, store payroll, and pricing actions. Athletic apparel saw strong sales and so did licensed apparel, team sports items, and footwear.

Strategies to watchDick's also made improvements in its omni-channel network. As a part of this, it opened 40 stores last year and strengthened its mobile capabilities, which include the development and roll-out of a new tablet site. With the new tablet site, it has seen a considerable increase in its traffic and a 30% increase in conversion rates.

Dick's has provided options to its customers -- they can shop online or in-store -- and this will ultimately increase the demand for its products. To satisfy the increase in demand, Dick's will open around 50 stores this year. Apart from this, it will make further changes to its online store.

To expand its e-commerce business, Dick's has started testing the "buy online, pick-up in-store" facility at specific locations to offer additional features to its customers and integrate its store and e-commerce operations.

In regard to specialty concepts, Dick's opened 79 Golf Galaxy stores in 2013 while it closed three of its underperforming stores in the fourth quarter. The sports retailer has worked hard to improve the customer experience it offers. It has opened two new Golf Galaxy stores this year in its new, larger prototype, which has increased apparel penetration. It also plans to open a Golf Galaxy website. In 2014, Dick's also plans to open one new Golf Galaxy store and relocate two stores which will have a similar format.

Dick's is shareholder-friendly as well as it returned $320 million to its shareholders in 2013. The company accomplished this through the payment of $64 million in quarterly dividends and around $255 million in share repurchases. The company plans to repurchase an additional $745 million of its shares going forward, and its low payout ratio of 19% suggests that it has room to increase the dividend as well.

In the long run, Dick's hopes to generate $10 billion in sales by 2017 with an operating margin of 10.5%, and it has been progressing in the right direction.

Sizing up the competitionHowever, competition from the likes of Foot Locker and Cabela's remains.

Foot Locker retails sports footwear made by the likes of Under Armour and Nike. So, the company can benefit from Nike and Under Armour's innovative footwear just like Dick's can. However, Foot Locker has a bigger size and a wider reach than Dick's. Foot Locker has more than 3,300 mall-based stores spread across the U.S., Canada, and Europe. In comparison, Dick's has just over 600 stores in the U.S. Foot Locker looks to increase its penetration through its storebanner.com website as well as opening new stores and renovating existing stores this year. So, Foot Locker threatens Dick's footwear segment.

On the other hand, Cabela's sales of hunting equipment have been gaining steam, driven by its omni-channel model. Cabela's promotes its products via platforms such as radio, TV, catalogs, email, and other digital communications. Customers can shop using its physical stores or the online channel. Cabela's already has an in-store pickup service in place while Dick's is only testing this strategy now.

Bottom lineAlthough Dick's faces serious competition from its rivals it has held its own so far. Dick's performed well in a tight scenario last quarter and it has a slew of initiatives under way to improve its business. Moreover, a cheap forward P/E of 16 and projections that call for robust earnings growth of almost 16.5% for the next five years make Dick's a stock worth considering for your portfolio.

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